Fed downplays recession anxieties

Alan Greenspan said the economy is slowing but not doomed.

"If the forces contributing to long-term productivity growth remain intact, the degree of retrenchment will presumably be limited," he told the Senate Banking Committee.

Greenspan’s semiannual report was meant to dispel some of the economic gloom that arose late last year when growth seemed to stop dead in its tracks. He appeared to want to put the best face on the slowdown, telling consumers and investors it was only temporary.

Preventing the U.S. economy from slipping over the edge were the same factors that were behind the longest expansion in history, he said: business investment and worker productivity. Better inventory management and other tools will help businesses ramp back up once inventories have been sold, according to Greenspan.

While he was careful not to sound alarmist, he did say that the economy was not yet out of danger.

"Downside risks predominate," Greenspan said. "In addition to the possibility of a break in confidence, we don’t know how far the adjustment of the stocks of consumer durables and business capital equipment has come."

Analysts took that to mean the Fed had not finished cutting interest rates. Economists expect Fed policy-makers to cut the target for a key short-term interest rate by another half a percentage point at their next meeting March 20.

Greenspan also said the Fed now believes gross domestic product will grow by between 2 and 2.75 percent this year, compared with the 3.25-to-3.75 percent forecast he delivered to Congress in July.

The Fed also raised its estimate for unemployment to about 4.5 percent by the end of this year.

The Fed sees inflation tied to gross domestic product rising by between 1.75 and 2.25 percent this year, down from the forecast of 2.5 percent made in July.

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